Fiscal cliff over but worse problems remain

Updated
January 03, 2013 08:57:00

The US government may have avoided the fiscal cliff but more serious budget problems are just around the corner. President Obama still has to negotiate significant spending cuts in the next two months, and will then need to convince Republicans to raise the debt ceiling again. Leading Australian economists warn it's creating an inreasingly risky environment for financial markets.

BRENDAN TREMBATH: The United States government has successfully avoided the catastrophe dubbed the "fiscal cliff" but there is now a new concern.

The government has hit a debt ceiling and will need to raise the amount it is legally allowed to borrow.

Leading Australian economists say financial markets still have plenty to worry about.

Finance reporter David Taylor prepared this report.

BARACK OBAMA: Happy New Year everybody.

DAVID TAYLOR: He was upbeat. The US president, Barack Obama, had successfully negotiated a tax increase for America's rich, sparing the country's middle class.

BARACK OBAMA: Thanks to the votes of Democrats and Republicans in congress, I will sign a law that raises taxes on the wealthiest 2 per cent of Americans while preventing a middle class tax hike that could have sent the economy back into recession and obviously had a severe impact on families all across America.

DAVID TAYLOR: The deal also means that many US companies will still get tax credits for the research they do. In addition 2 million Americans will also continue to receive unemployment benefits.

Economists around the world were noticeably relieved. David Blanchflower is a former Bank of England policy maker.

DAVID BLANCHFLOWER: Obviously the consequences of this if it really had hit and there was no sort of preventing it happening, that would be about a 4.5 per cent drop in GDP to the US and obviously have a major effect on the rest of the world so I think the world breathes a sigh of relief.

DAVID TAYLOR: There may be less anxiety now, but the president conceded there was still more work to be done to put the US budget in to a sustainable position.

BARACK OBAMA: And there will be more deficit reduction as congress decides what to do about the automatic spending cuts that we have now delayed for two months.

DAVID TAYLOR: The president said that very casually but it does have the potential to become a serious problem.

While the majority of Americans will not suffer tax increases, the issue of where to cut government spending has not been resolved.

Put simply, the US government is spending beyond its means and has now officially borrowed as much money as it legally can - around $16.4 trillion.

The debt ceiling has been reached.

MATT SHERWOOD: With these tax delays or tax reversals, that will mean that the US debt to GDP on a gross basis anyway will reach a record high in 2015 of 120 per cent of GDP. That is what people are trying to get Greece down to by 2020. So America is certainly not the shining light that it once was on this front.

DAVID TAYLOR: Matt Sherwood is the head of investment strategy at Perpetual Investments. He said if you thought finding agreement on tax increases was hard for congress, when it comes to spending cuts you ain't seen nothing yet.

MATT SHERWOOD: This is something that they're very ideologically constipated about. What we are going to see in the next couple of months of course is that as these spending cuts come to the fore, markets are probably going to get a little bit more jittery if the noises from the congress aren't of a negotiated agreement.

DAVID TAYLOR: I mean it seems to me that there is more serious issues right around the corner?

MATT SHERWOOD: That's correct.

DAVID TAYLOR: There are now two major hurdles for the US government to overcome. They include finding a way to cut billions of dollars from the budget, and getting agreement from Republicans on the amount the country can borrow.

SCOTT HASLEM: And the delay in government cuts for two months brings that right up to the where it is likely to going to hit the debt ceiling and so I expect we are going to be seeing some pretty tense negotiations by the end of February again in the US.

DAVID TAYLOR: The US treasury secretary, Timothy Geithner, has arranged a kind of bridging financing to keep the US economy afloat until the end of February.

BRENDAN TREMBATH: David Taylor reporting.

World stock markets have rallied after US politicians clinched the deal to avert the feared "fiscal cliff". More in finance.